Aussie energy plays still on the radar despite falling oil price

Australian oil and gas companies are still attractive for investors even in the face of a falling oil price which analysts believe could slip even further this year.

Morgan Stanley analysts have highlighted Australia’s top-performing oil and gas companies for the year ahead as JP Morgan predicts an oil downturn in the coming months.

ASX-listed FAR's oil discovery off the coast of Senegal may be the biggest since the Jubilee find off Ghana in 2007, some experts say.

"While geopolitical tensions and lingering risks of large supply disruptions remain an upside risk throughout the second half of 2018, we think that prices will be corrected downwards towards the end of the year and remain capped in 2019," JP Morgan said in an analyst note.

It singled out the larger Australian-based operators Woodside, Origin and Beach as having the potential to expand.

“Oil prices drive cash flows from existing assets while improving LNG fundamentals set up brownfield (existing) expansion opportunities,” the analysts said of these companies.

“We think we are moving into a phase where undeveloped resources will be incrementally valued by the market over time. We upgrade our industry view on Australian energy to attractive.”

The ASX-listed Senegal offshore oil play FAR Limited was also highly rated.

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“[It] remains one of the most attractive offshore oil discoveries of the last few years and the market is conservatively valuing FAR’s interest in it given the uncertainty, time to development and capital spend.”

However, this may change following OPEC’s meeting later this month, where a decision will be made to continue oil production caps or to increase output levels.

OPEC’s impact

Australian oil and gas companies are expected to weather further oil price volatility.

Over the past 12 months, the oil price has risen about 65 per cent as OPEC and Russia cut back on global oil supplies and the US has threatened to carry out trade sanctions on Iranian oil. This aggressive run has since slowed after rumours emerged that Saudi Arabia and Russia were planning to increase production despite their earlier agreement with oil cartel OPEC members to slash global supply levels.

Saudia Arabia and Russia have not carried out their plans but will aim to convince the rest of OPEC to fall into line with increased production at the next OPEC meeting in Austria on June 22.

Platts’s quantitative analysis manager, Vito Turitto, forecast more volatility for oil at the end of the month, after the meeting.

“Market participants expect more volatility in the short-to-medium term, probably due to geopolitical risk and the outcome of June’s OPEC meeting.

Other bankers have called on OPEC to lift supply to balance markets.

“Everybody is all bearish about the recent announcement of a million barrels per day extra supply, but the market needed it,” Jeff Currie, Goldman Sachs global commodity research head, said.

“It not only needs it, it is mandatory. Otherwise, you just drive the bus off a cliff.”

Morgan Stanley believes oil and gas companies will weather any up or downwards price trends.

“We think downside risks that plagued the industry during 2017 are dissipating. To be clear, oil prices will likely retain volatility but arguably much of the significant downside risk has been reduced while upside risk remains given underinvestment across the industry since 2014 combined with strong demand,” Morgan Stanley analysts said.